UMC CHAIRMAN FINED, INVESTIGATIONS CONTINUE

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 001923

SIPDIS

DEPT FOR EAP/TC
DEPT PLEASE PASS AIT/W

E.O. 12958: DECL: 04/25/2015
TAGS: ECON EINV CH TW
SUBJECT: UMC CHAIRMAN FINED, INVESTIGATIONS CONTINUE

REF: A. TAIPEI 709

B. TAIPEI 1402

Classified By: AIT Director Douglas H. Paal, Reason 1.4 d

Summary
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1. (U) Taiwan's Financial Supervisory Commission (FSC)
announced on April 20 that it would fine United
Microelectronics Co. (UMC) Chairman Robert Tsao NT$ 3
million (USD 95,000) for two separate violations of failure
to disclose important information to stockholders. The
information concerned UMC's relationship with Mainland
semiconductor manufacturer He Jian. The FSC has indicated
that it has completed this stage of its investigations into
UMC but could reopen the case depending on the results of
investigations by other Taiwan agencies. Meanwhile,
Taiwan's Investment Commission continues to look into UMC's
relationship with He Jian and to review UMC's application
to accept a 15-percent stake in the PRC firm in
compensation for consulting services provided. The Hsinchu
County Prosecutors Office of the Ministry of Justice also
continues its investigations into UMC. End Summary.

FSC - First Sanction Against UMC
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2. (U) On April 20, Taiwan's Financial Supervisory
Commission (FSC) announced that it would fine United
Microelectronics Co. (UMC) Chairman Robert Tsao a total of
NT$ 3 million (USD 95,000) for two separate violations.
Tsao was fined NT$ 600,000 (USD 19,000) for failure to

SIPDIS
disclose to shareholders in 2002 that it provided
managerial and administrative assistance to He Jian
Technology (Suzhou) Co. in exchange for an oral commitment
that He Jian would provide some return to UMC at a later
date. In addition, Tsao must pay NT$ 2.4 million (USD
76,000) -- the maximum fine -- for late disclosure of the
March 4 Board of Directors decision to accept a 15-percent
stake in He Jian in exchange for UMC's previous assistance.
UMC did not announce the decision until March 17, well
after the two-day limit allowed under Taiwan law.


3. (U) FSC Deputy Director General Lee Chi-hsien told the
press that the FSC would now close this stage of its
investigation into FSC. It has no further plans to impose
sanctions against the firm unless or until further evidence
of malfeasance appears. Depending on the findings of the
investigations of other government agencies, FSC may reopen
the case to look at additional violations.

MOEA - Investigating Violations, Reviewing Application
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4. (SBU) The Ministry of Economic Affairs (MOEA) Investment
Commission continues its review of the He Jian case from
two angles. First, the Commission is considering whether
He Jian violated the "Act Governing People's Relations
Across the Taiwan Strait" by transferring prohibited
technology to the PRC. Emile Chang, the Commission's
Deputy Executive Secretary, told AIT/T that if UMC is found
guilty of such a violation it faces a fine of up to NT$ 25
million (USD 790,000). He would not speculate on how long
the Commission would take to complete its investigations.


5. (SBU) Second, the Commission is reviewing UMC's proposal
to accept He Jian's offer to turn over a 15-percent stake
in the firm. The Commission must determine whether such a
proposal meets Taiwan's strict regulations on semiconductor
investment. Chang expressed some skepticism, but refused
to predict whether the Commission would approve the
proposal. It appears unlikely that such an investment
could meet current Taiwan regulations. He Jian already
uses technology that Taiwan firms are prohibited from
transferring to the Mainland. According to press reports,
MOEA Minister Ho Mei-yueh hinted quietly that although UMC
could not accept shares, it might be permitted to accept
other forms of remuneration in exchanging for the
managerial consulting assistance that it claims to have
provided He Jian.

Ministry of Justice - Keeping Quiet
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6. (U) Meanwhile, the Hsinchu County Prosecutors Office
under the Ministry of Justice continues its investigations
into criminal wrongdoing by UMC. It has revealed few
details on the progress of its investigation and the
evidence it has recovered from raids on UMC's offices and
interviews with UMC and He Jian executives. The
prosecutors have not indicated when they might file
charges. However, the travel ban imposed on 19 UMC and He
Jian employees has been lifted. The He Jian employees who
had been stuck in Taiwan since the Lunar New Year holiday
in February have returned to the Mainland. Three employees
are still prohibited from leaving Taiwan.

Comment - Environment of Uncertainty
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7. (C) The wheels of justice continue to grind slowly in
the He Jian case. To date, the fines that have been
imposed or threatened are low compared to the potential
gains if UMC is successful in legalizing its stake in He
Jian. It is hard to estimate the legal costs that UMC
faces, let alone the costs imposed by the damage to its
reputation. However, if the Taiwan government expects its
cross-Strait economic policies to have any teeth, it will
have to make it clear that UMC faces serious legal
sanctions. Otherwise, Taiwan's companies and entrepreneurs
will see little reason not to circumvent Taiwan law and
invest illegally in the Mainland. The results will have an
impact on Taiwan's ability to enforce export controls that
are important to U.S. interests. The UMC case also shows
that while Taiwan's cross-Strait restrictions are failing
to keep advanced technologies out of the PRC, they are
placing those firms that observe the letter of the law at a
disadvantage. Taiwan needs to rationalize these policies
in a way that allows Taiwan firms to compete but preserves
the island's vital interests as well. End comment.
PAAL